“The Top 5 reasons for business failure are ‘financial’ “(Jessie Hagen, US Bank).
“The No. 1 risk to any start-up is running out of money” (Asheesh Advani, CEO of Covestor. Founder of CircleLending, which was acquired by Virgin).
It is quite common for start-up businesses to opt for “bootstrap” funding (i.e. methods like re-investing business profits) to avoid or reduce the need to use finance from external investors. Most entrepreneurs will fund the early stages of a company’s development with their own funds as well as from friends and family.
However typically as the business grows they will need to find external sources of funding and this ability to strongly plan the future financial needs of the company plays a huge part in how much capital can be raised. Knowing the type, amounts & time-scales for capital needed, helps to identify the best source of funding and the pros and cons of each. However it can still be challenging to sort through the many funding options available to determine which are right for you, when and why.
For External sources of funding, public sources are typically in the form of grants or loans and private sector sources typically fall into two categories – debt finance and equity finance. Regardless of the source of funding, anyone ‘putting money’ into your company will want to make sure that they are going to get a good return on their investment and will therefore rigorously assess all the risks involved.
The amount of detail and preparation needed is therefore directly related to the amount of outside capital you hope to secure. Getting ready for any type of assessment process (loan or grant application, due diligence, etc) is essential because funding will only be given when you meet their criteria and can convince them your company has has excellent prospects for success and a clear exploitation route to market.